Sharon Katz

The Changing Relevance of Accounting Numbers to Debt Holders over Time

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Abstract:
We examine the change over time in the information content of accounting numbers from the
perspective of bondholders and the causes for this change. Using proprietary longitudinal data,
we find that, in contrast to the decline in the information content of accounting numbers to equity
holders over time, the information content to bondholders has held steady or risen. The rise is
attributable to economic factors such as an increase in risk and in the frequency of unfavorable
news to which the valuation of debt is more sensitive than that of equity. There are indications,
however, that reporting factors, specifically an increase in conservatism over the last four
decades, is associated with this rise. The findings contribute to the scant literature on the use of
financial information by bondholders and the extent to which financial reporting meets their
unique information needs. Given debt holders prominence as users of financial statements, the
findings have important implications for accounting standard setting.